The fast-casual industry has been a tough one lately, and Panera Bread (NASDAQ:PNRA.DL) has had to fight hard to keep up its performance. Even as Panera has aimed to modernize its customer experience, food and beverage rivals like Starbucks (NASDAQ:SBUX) have taken aim to try to recapture some of the success that Panera has had at its expense. Coming into Tuesday's fourth-quarter financial report, Panera investors were bracing for a slight drop in earnings compared to the year-ago quarter, but the fast-casual chain managed to give investors a solid earnings surprise and keep its growth engines well stoked. Let's take a closer look at Panera Bread and what its results for the fourth quarter say about its future.
Panera Bread rises like a good loaf of bread
Panera's fourth-quarter results gave investors some though not all of what they were hoping to see. Revenue rose just under 3% to $691.8 million, falling short of the $695 million consensus forecast among investors. Even though Panera reported a GAAP net income decline of 11% to $43.2 million, adjusted earnings of $1.88 per share were up a penny from the year-ago quarter and topped investor expectations by a full dime per share.
Looking more closely at the numbers, one key to Panera's expansion efforts has been restarting its growth in comparable-restaurant sales. Company-owned bakery-cafes saw comps rise 3.6%, and even though franchise-owned restaurants held back overall growth, total comps still managed to climb 2.3%. Traffic increases were partially responsible for the favorable comps, but willingness for each of those customers to spend more at Panera played a larger role.
On the negative side, operating margins continued to weaken for Panera. Higher structural wage increases and costs related to restaurant start-ups and the Panera 2.0 initiatives sent total costs for the company up by 4.4% for the quarter. A $5.4 million refranchising loss prevented the company from posting higher GAAP earnings as well.
Panera CEO Ron Shaich emphasized the long-term trajectory that Panera is on. "Our strategic plan is working," Shaich said, and "we are confident that our results will continue to strengthen as the start-up and transition costs associated with our initiatives begin to crest and our sales continue to grow." The CEO thinks Panera will start seeing even faster earnings growth in the years to come.
What's next for Panera?
Early signs pointed to immediate prospects of greater success for Panera in 2016. During the first six weeks of the year, company-owned store comps jumped 6.4%, dramatically accelerating Panera's previous pace of growth.
Expansion efforts also continue to drive Panera's results. During the fourth quarter, Panera opened 18 new company-owned restaurants, and franchisees opened another 15 cafes. That brought new store counts for full-year 2015 to 112, almost equally distributed between company-owned and franchise locations. Panera is poised to jump above the 2,000 store mark early in 2016 at its current rate of growth. Conversion activity for Panera's 2.0 initiative also moved forward, and another 119 conversions took place during the quarter, bringing the total to 410 converted stores.
Panera's guidance looked promising for investors. The company thinks comps for company-owned stores in 2016 will rise 3.5% to 4.5%, accelerating from 2015's pace of growth. Operating margins will continue to weaken by between half a percentage point and a full percentage point for the year, but Panera expects to open as many as 100 new restaurants systemwide.
Still, Panera investors need to understand that its comps growth still isn't climbing at the same rate as competitors like Starbucks. In its most recent quarter, Starbucks posted gains of 8% in global comps, including a 9% rise in its stores in the Americas. Admittedly, Starbucks' business model is different from the more food-focused Panera, but Starbucks has aimed at offering a dining experience as well and could use food as a growth driver in the future.
Investors celebrated Panera's results, sending the stock upward by nearly 3% in the first hour of after-market trading following the announcement. To hold Starbucks and other potential competitors at bay, Panera needs to stay on its current growth track. If it does, then further share-price gains could be forthcoming throughout 2016 and beyond.